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National Software Industry Development: Considerations for Government

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Article  in  Electronic Journal of Information Systems in Developing Countries · May 2003

DOI: 10.1002/j.1681-4835.2003.tb00090.x

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EJISDC (2003) 13, 10, 1-17

National Software Industry Development:

Considerations for Government Planners

Shirley Tessler and Avron Barr Nagy Hanna

Aldo Ventures, Inc. World Bank
info@aldo.com Nhanna@worldbank.org

ABSTRACT
Software presents an unusual set of problems for policy makers. As a major global industry,
it has been successfully targeted by a growing number of countries for its potential to
generate export revenue. At the same time, it si an essential, high-risk, and increasingly
expensive component of Information and Communications Technology (ICT)-related
programs to increase government effectiveness and to bring local firms in other industries up
to globally competitive performance levels. This paper outlines the range of considerations
specific to software within ICT planning and discusses government’s role in accelerating and
shaping that growth in support of social and economic priorities. We draw on the experience
of both developed and emerging economies to argue that government should take an active
role in software industry development, and to lay out the full range of possible government
actions (both policies and programs). Every country’s path seems to be different – the best
course of action will depend on the resources available (including infrastructure and human
resources), on the state of the global software industry at that specific time, and on the
country’s unique situation, such as languages spoken, regional or cultural ties with major
markets, a tradition of entrepreneurship, or an expatriate business community.
1. INTRODUCTION
The range of ICT-related concerns facing policy makers has increased dramatically in recent
years: communications infrastructure, procurement for go vernment automation and e-
government programs, intellectual property, government-sponsored research programs,
incubators and technology parks, engineering education, foreign investment and, of course,
the potential for export revenue. It is usually in this last area, the potential for dramatic
economic growth like India’s or Ireland’s, that first brings software to the forefront as a
separate issue within ICT.
Software is a relatively low- investment, environmentally friendly, high-growth global
industry – a good target growth industry for many countries. But it has also become the most
critical and expensive element of the government and business systems that every nation
must build for itself. As Stanford Professor Edward Feigenbaum put it while serving as Chief
Scientist for the US Air Force, we now live in a “software-first world” (Clark et al., 1998).
The increase in global demand that makes software exports a growth industry is driven by the
continued consumption of software by other countries and business enterprises. Software
(and its continued maintenance) has become the dominant cost of business and government
information systems around the world (Gartner, 2001), and a significant cost factor in a range
of manufactured goods from consumer electronics to automobiles (VDC, 2002). Good
strategic planning about government automation projects and investment incentives to
domestic business can have a positive impact on the growth of a country’s software exports
compared to relying on market forces alone. Fur thermore, creating certain types of software
exports requires coherent long-term planning and investment strategies to complement and
augment market-driven activity.
Every software-exporting country has evolved a unique industry, shaped by its own
resources and situation and by the particular global opportunities presented at the time. For

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example, Japan exports mostly software games, India exports primarily software services to
large software development shops, Ireland exports software products (created by MNCs
located in-country as well as by a growing number of indigenous companies), and Israel
mostly exports software technology which is subsequently productized by firms in the US
and Europe. The global software industry continues to evolve, and countries now looking to
develop their software exports face a different global situation, and are likely to evolve
fundamentally different software industries. The current shape and dynamics of the software
industry should, therefore, inform ICT planning and policy, no matter what the country’s
stage of economic development. For countries with deficient infrastructure and tight
resources (such as Ireland in the 1970’s), selective government initiatives have been critical
to successful software industry development.
The purpose of this paper is to clarify the various issues typically addressed by
government planners in developing national software strategies and in deploying local
software capabilities in support of national priorities. We have a practical approach for
thinking about any nation’s software strategy. Key steps would be to: develop an
understanding of the national economic and social priorities; inventory current software
resources and activities; identify relevant trends and opportunities in the ever-changing global
software industry; formulate strategies for software industry development that build on
dynamic comparative advantage; and design tactics for dealing with specific issues.
Our approach takes into account several unique characteristics of the software
industry:
• The different segments of the software industry (shrink-wrapped products, enterprise
products, software services, embedded systems, technology licensing, etc.), each with
its own methodologies and its own global marketplace with established players,
business methods, and barriers to entry;
• The different kinds of talent and skills that make up software teams in different parts
of the industry. There is a wide range of technical skill categories, and other skill
areas, like project management, technical hiring, and product marketing, that are just
as important to successful industry growth;
• The key role of innovative startup companies in the industry, the importance of
entrepreneurship, venture capital, the developmental stages of a software startup, and
the special supportive habitat required by small technology companies;
• The need to build new software on top of layers of existing, “base- level” software
infrastructure, which demands that domestic systems use industry-standard
architectures so that customers are comfortable with domestic providers and so that
local innovations can be directly exported; and
• The absence of a manufacturing phase in software product development, which makes
the software publishing industry especially fluid. Product specifications, technology
platforms, marketing partnerships, etc. are unusually volatile. This makes planning
difficult and introduces additional risk.
This paper first frames the question of national software strategy in terms of
deployment of a country’s “software capacity”. Ireland is discussed as an illustrative example
of successful government efforts to develop a national software industry. We then discuss the
balance between domestic and export software industries and the appropriate role for
government in establishing that balance. Finally, we outline the main elements of a balanced
national software strategy that would harness software technology to address both local
development challenges and global market opportunities.

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2. THE S TRATEGIC D EPLOYMENT OF NATIONAL SOFTWARE CAPACITY

With so many ICT-related concerns pressing government planners, it may not be completely
obvious why software requires special attention and consideration. The reason is that
software has now become a core competency and general-purpose technology that is critical
to the global competitiveness of most industries (all companies have the same hardware –
they compete with software) and to the effective deployment of government services (beyond
the basics of data processing) in every country, regardless of its level of economic
development.
Not only is software a critical part of modern industrial infrastructure and an
important industry in its own right, but it is also the vehicle for implementing the other key
elements of a knowledge economy: responsive and transparent government; a supportive
business environment with low transaction costs; enhanced learning environments; and
effective social programs. Software-related policy must therefore be distinguished from
industrial policy generally. Software is a fundamental capability that is deployed across
almost all sectors of an economy. Moreover, as a nascent industry and fast-changing set of
technologies, market forces alone are often inadequate to harness the industry’s potential to
address public services and social priorities and to serve the needs of the poor, rural areas,
small and medium enterprises (SMEs), and non-government organizations (NGOs).
“Software capacity” may be defined as the total amount of software that an
organization, in this case a country, can build and maintain (Tessler and Barr, 1997).
Software capacity is a key to participation in the global knowledge economy. A nation’s
software capacity is a limited resource that must be deployed strategically, in order to balance
1
short- and long-term goals.
Figure 1 illustrates the eight ways that a nation’s software capacity can be deployed.
The first step in strategic planning is recognizing that, at any given point in time, the
country’s capacity to undertake the full range of activities is constrained, and that tradeoffs
must be addressed explicitly. Will the nation’s programmers be employed building systems to
modernize government operations, or re-building the national financial infrastructure, or will
they be wo rking in the local facility of a multi- national electronics manufacturer, or become
entrepreneurs offering software products and services abroad? Will the development of new
industries that depend on ICT, like offshore outsourcing of back office work, cons ume a large
fraction of the available software capacity? How many of the best software people are needed
to train the next generation, so as to increase the nation’s software capacity?

Government effectiveness and social programs

Global competitiveness & linkages for existing businesses
Total Software embedded in products of all sorts
Software Exports of software services, products, & technology
IT-enabled business opportunities
Capacity Specialized services to software publishers
Education of the software workforce
Research on new software technologies and solutions

Figure 1. A nation's capacity to produce and maintain software is deployed across a

variety of business and social endeavors.

1
For a more complete discussion of software capacity and its deployment across the different sectors of the
software industry, see Barr and Tessler, 1999.
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To the extent that government policies and programs affect the deployment of
software resources, decisions must reflect the country’s economic and social priorities, for
example, industrial modernization, employment, government effectiveness and social
programs, hard-currency exports, foreign direct investment, knowledge economy
development, or increased national prestige. Software services exports, for example, would
be particularly appropriate to employ a large number of under-employed engineers, while
ICT-enabled services businesses might be a better strategy for employing educated, non-
engineers with adequate language skills.
Also, the time involved for developing the segments varies. IT-enabled businesses, for
instance, could be flourishing in less that two years, once infrastructure is in place and
policies and regulations are reformed, assuming an appropriate workforce is available.
Developing a robust software products publishing industry, on the other hand, could take
many more years, even after the prerequisites are in place.
3. SUCCESSFUL NATIONAL STRATEGIES FOR EXPORTING SOFTWARE: IRELAND’S
EXAMPLE
Table 1 summarizes the successful national software industry strategies of the three countries
that achieved billion-dollar software exports in the last decade. Each of these countries had a
different set of goals in developing its software capacity, each started with dramatically
different resources, and each capitalized on opportunities in a different part of the software
industry at the time. In every case, however, government action was pivotal: policy change,
investment, and proactive government programs. Some were more strategic in their approach
than others, but all three have had success. Several other countries that have set their sights
on software exports, including Malaysia, China, Russia, Korea, and Singapore, are still
2
struggling to crack the export industry. Some have taken a more balanced approach, giving
at least equal or more weight to the use of software, and ICT generally, in support of the
knowledge economy or information society. Countries having good success with that
approach include Korea, Singapore, Estonia, and Finland.
Ireland’s case is particularly illuminating (see Crone, 2002). In the early 1970’s,
Ireland was facing continued emigration of its most educated people (a third of college
graduates were leaving permanently every year), a general population decline, and high
unemployment. The government sought to reverse these trends. It identified high- tech as a
high- growth, environmentally friendly industry and decided to focus its resources on
developing that industry. It created a strategy to lure high-tech multinationals to Ireland
through tax incentives and through aggressive promotion of Ireland’s advantages: an
educated, English-speaking workforce, proximity to Europe, and lower telecom rates than on
the European continent. The centerpiece of its tax incentive program was a top corporate tax
rate of 10%.
Ireland’s long-term goal was that Irish nationals employed by the MNC’s would learn
the high-tech business first-hand, and then move on to create their own high-tech businesses.
After 20 years, it became obvious that this strategy had not worked as planned, in spite of its
success in slowing the emigration of talent and increasing both employment and exports.

2
Barriers to significant growth in software exports include: high piracy rates at home, small talent pool, lack of
engineering innovation, language barriers, and difficult business and regulatory environments. If its regulatory
barriers continue to decline, China is likely to become the next $B software exporter because of its enormous
workforce, investment in education, and global network of business contacts.
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Ireland Israel India

(started in early 1970s)
Resources English speaking workforce;
European location; relatively
cheap telecommunications.
Strategic Create jobs in Ireland at all
Goal levels. Learn the software
industry (low capitalization and
environmentally friendly vs.
manufacturing jobs).
Opportunity Flow of US, Asian technology
Targeted into the EU. Product
localization and support
difficulties of MNC’s in
dealing with multi-lingual
market. High telecom costs on
European continent.
Key Offer tax & other incentives to
Government software MNC’s to set up shop
Actions in Ireland.
2001 Export $1.3B, exported by indigenous
Revenue companies, almost entirely
4
software products
(early 1980s)
State-of-the-art technology
developed in military R&D
projects.
Commercialize military
technology; create export
industry; employ tens of
thousands of Russian
immigrant programmers.
Increasing demand for
software technology,
especially advanced
security technology, in the
US as networking became
commonplace.
Create Yozma and other
industry investment
programs; BIRD alliance
programs; technology
parks.
$3B, products and
technology licensing
(late 1980s)
Tens of thousands of highly
trained, underemployed,
English-speaking engineers.
Create export industry for
job creation, foreign
exchange earnings, and
technology self-reliance.
Shortage in US & Europe of
low-level programmers
created by demand for ERP
installation, Y2K
preparations, and e-
commerce conversion.
Combine on-site labor with
offshore outsourcing
facilities; invest in telecom &
computing infrastructure, and
quality certification to
establish credibility.
$7.5B, almost entirely
software services

Table 1. National Software Strategies. The result of the variation in their circumstances and
goals, and of the opportunities presented at the time, is that each country has a different type of
software industry. Export revenue represents both product and services sales. Sources :
NASSCOM, Enterprise Ireland, and the Israeli Association of Software Houses.

Ireland discovered that the people employed by the MNC’s did not spin off a great
many new companies. The problem was that the people who were capable of spinning off a
new software company were not the kind of people that the MNC’s were hiring. The MNC’s
created new jobs, but not for the most creative and software-knowledgeable people. They
hired folks to answer technical support questions at call centers, create and test local-
language versions of software and documentation, etc. Few top- level programmers or
business innovators were needed. Furthermore, many of the satellite businesses that were
started to serve the MNC’s were also low- margin, low-tech businesses like printing and
packaging – not software services firms.
Irish software industry government planners discovered that innovation came, not
from the MNC’s, but primarily from the same sources that traditionally spawn innovation in
the US and Europe: from corporate IS departments of both high- tech and non- high tech
companies, and secondarily, from university and other research environments (Crone, 2002).
They recognized that innovation in software is stimulated by those with good technical
education, lifelong learning opportunities, access to enabling base- level software systems (as

4
The export revenue figure for Ireland jumps to $8B when flow-through from multinational software companies
(the “overseas” firms) located in Ireland is included. See Enterprise Ireland, www.enterprise-ireland.com.
Unfortunately, the figures for Israel and India also include flow-through from multinationals, but the authors have
not found reliable figures for the export activity of just the indigenous companies in these latter two countries.
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those found in corporate IS departments), and real on-the-job experience allowing a creative
worker to see that some task could be done better.
In 1993, Enterprise Ireland was formed to focus specifically on creating an indigenous
software industry. It introduced the Irish version of the two key programs that had been the
cornerstones of the Israeli software industry development strategy: a venture capital program
for supporting software entrepreneurship, and an R&D program for broad support of
technology innovation and adaptation. Like Israel, both of these initiatives encourage
cooperation with foreign organizations. Also, as in Israel, the Irish agency continues to spend
a considerable portion of its yearly budget on global promotion activities. As a result, in 10
years’ time the indigenous Irish software industry has grown from almost nothing to $2.8
billion, including $1.3 billion in export revenues (Arora, 2002). The indigenous industry also
4
now accounts for a full half of the total 25,000 people employed directly in the industry. At
approximately $100,000 dollars in revenues per employee (and growing), Ireland already
enjoys a highly leveraged and productive software workforce.
The MNC’s did, however, contribute something of great value to the growth of
Ireland’s software industry: they helped to create the “habitat”. Their very presence in and
around Dublin started a migration of high-tech professionals from within Ireland and
eventually from abroad (both returning expatriates and a second-wave of MNC’s), all aiming
for Dublin. New foreign firms could find experienced software professionals in Dublin, and
could also find a variety of support firms. These firms were not just the low- level services
firms mentioned above, but also some with high- level, specialized expertise in areas such as
logistics and distribution to EU nations, call center setup, and the like. The expertise
developed in these domestic support firms to serve the needs of the MNC’s is now an
important source of support for the indigenous industry. In turn, the indigenous software
industry is driving new business creation in an ever-growing variety of specialized high-tech
support firms, as well as fueling the expansion of the private venture capital industry.
Balancing the development of the software industry to address the needs of potential
local users as well as the opportunities for export is important to an effective national
software industry strategy and to overall development. As Ireland discovered, focusing on
software exports alone is not always a winning strategy. Without a software industry that is
attuned to domestic users, neither software exports nor social benefits will develop optimally.
For example, in the case of Ireland in the 1980’s, the heavy emphasis on export growth led to
limited diffusion of ICT among local small and medium enterprises, and thus missed
opportunities to contribute to overall employment and competitiveness of the economy.
4. BALANCING SOFTWARE EXPORT WITH DOMESTIC N EEDS
The global shortage of software engineers and the fast growth of demand for software
applications in advanced economies have attracted the attention of both software talent and
policy makers in emerging economies. The global opportunity has led to an almost exclusive
focus on software exports. This bias is further reinforced by planners’ tendencies to focus on
a single concern: generating hard-currency exports, driving up employment, or pursuing
idiosyncratic first projects for political reasons (such as to demonstrate leadership and or gain
additional support). In order to achieve any reasonable goals on a sustainable basis, a strategy
must be balanced. Directing the deployment of software capacity towards social and
government al applications, as opposed to export-focused strategies, should be part of that
balance (Hanna, 1991, 1994). Moreover, opportunities to manage local software projects and

4
In fact, as of 1999, the high-tech industry became the second largest employer in Ireland after the food industry.
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serve local users are often essential to gain experience in software project management and
advanced technologies (Schware, 1992).
The domestic software industry includes the development and maintenance of
government, business, finance and telecommunications software systems, including the firms
that offer products and services for those projects. It also includes the locally developed
software for consumers, including educational and game software. We offer several caveats
to government planners concerning the domestic software industry. First, there are few
regions remaining in the global software industry that are so insulated from foreign
competition that they can sell second-class software. In every software segment, local
providers will have to compete for local business with powerful offshore vendors. It is
important that local suppliers be given a chance, but they must be required to produce state-
of-the-art results.
Second, without world-class software, even “low-tech” industries like tourism and
agriculture will be handicapped. Modern firm and supply chain operations in all industries
require sophisticated IT, but innovation and strategic competition typically require new
software development. Whether it’s marketing on the World Wide Web or collaboration with
business partners abroad, new ideas about how to improve products and services are often
implemented, measured and managed with new software systems.
Third, the alternative to expanding software capacity domestically is to buy the
software that industry and government needs from offshore suppliers. While no country or
major industry can afford to rely solely on foreign-supplied software, offshore suppliers do
play an important role: 1) they force domestic systems to be at (or at least to recognize) the
state of the art in terms of base- line technology; 2) they can undertake projects that must be
done very quickly when domestic sources are unavailable; and 3) they can function as
training and investment resources through alliances with domestics companies.
Finally, the prestige of software careers is directly affected by the IS departments and
services firms that work on domestic projects, both social and commercial. It is the prestige
of the available careers that draws talented young people into software, which in turn is the
key to continued development of software capacity. In particular, government hiring and HR
policies can directly influence the perceived value of software talent. As the Irish learned,
innovative technical ideas often come from software workers in domestic industries (Crone
2002). In turn, the export industry grows out of the domestic industry; and vice versa, since
the export industry needs a domestic market to experiment with new ideas, test products, and
serve as reference sites.
It is important not to lose sight of the potential impact of software exports. National
strategies must balance export potential with internal growth or both will be impaired.
Software continues to be a high- growth industry compared to most industries in either
manufacturing or services sectors (see Enterprise Ireland, 2001). It is one of the few modern
industries that is open to new entrants with limited financial resources and, because it affects
all areas of a nation’s economy and is environmentally friendly and sustainable, it is a
particularly attractive target for emerging econo mies.
5. WHAT IS THE GOVERNMENT ’S ROLE?
Governments can play several roles in support of the development of software exports and in
the application and diffusion of software or ICT in priority sectors of the economy. For
example, creation of a supportive regulatory environment for telecommunications and
Internet; protection of intellectual property rights; targeted investments in software education
and research; and broad promotion of ICT literacy are actions that would promote long-term
progress in both domestic and export activities. In addition, government can promote its
domestic software industry effectively in a number of ways, such as by investing in

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government automation and e-government projects and adopting competitive procurement

practices for software products and services. Government can also undertake a variety of
actions to develop its export industry, such as partnering with software exporters to promote
the national high-tech positioning, adopting quality assurance standards, and stimulating
high-risk capital and foreign investments.
The range of government roles is expanding and lessons of relevance to emerging
economies are accumulating, although much more systematic evaluation of various programs
in this emerging field is urgently needed (see Hanna et al., 1996, and Kraemer and Dedrick,
1999).
Even in the USA, where markets are most developed and competitive private
enterprises and entrepreneurship are plentiful, the federal and state governments have played
many important roles over the years. The US government played a lead role as rule maker,
such as in providing incentives for risk capital and relaxing regulations on the use of pension
funds for venture capital. It was also active in reforming or updating laws on intellectual
property rights, telecommunications, bankruptcy, labor, etc. Secondly, it played a major role
as a lead customer, setting requirements and standards. Moreover, under the Small Business
Act, the Small Business Investment Corporations (SBICs) were created, to match government
funds with private investments in new business startups. The SBIC program proved to be a
critical element in the creation of a private venture capital industry. Finally, the federal
government funded research that was targeted to semiconductors, telecommunications, and
computer science (software), focusing on centers of excellence such as Stanford and MIT.
The history of the Internet, for example, demonstrates this role of the federal government as a
key funder and early adopter of new technologies. The roles played by the state and local
governments in the US are too diverse to be covered here, but they also proved to be catalytic
and influential, if not always successful.
The role of government in promoting software and knowledge industries in emerging
economies cannot be to automatically emulate the USA or other OECD countries. On the one
hand, government capabilities in investing, influencing and partnering vary significantly, and
most developing countries’ governments are limited by severe financial and human resource
constraints. On the other hand, the local private sector, in the software industry as well as in
many other industries, often face some basic constraints: under-developed infrastructure, poor
investment climate, and uncertain or restrictive regulations. In this context it is instructive to
examine how the software technology parks of India, initially financed by the federal then
state governments, did address some of the basic telecommunication and physical
infrastructural problems facing software SMEs, as well as provide incentives and export
facilitation measures. In the process they helped create demonstration effects and the
beginning of some dynamic clusters. Significant lessons could be also learned from the
relatively successful and extensive business incubation programs of the governments of
Brazil and China (Hancock, 2002).
Experience suggests several broad principles or best practices in establishing a
national software strategy. First, the government’s role is primarily about providing an
enabling environment through supportive regulations, incentives, and strategic investment
and promotional programs. Direct governmental intervention in leading-edge technology
initiatives most often produces unsatisfactory results. If these top-down technology initiatives
do not fail outright (such as the Fifth Generation Program in Japan, for example) then they
often end up successful in form only, with far less private creation of innovation or new
business than would be anticipated based on the level of government expenditure, as in
Singapore and Malaysia (Mellor, 2001). It is best if government sees its role as
complementing what the market is doing, and plans eventual withdrawal from incentive and
investment programs on a pre-determined time- frame, to give private sector entities a chance

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to emerge or a new market to develop. For example, five years after the Israeli Yozma
program was implemented to create an indigenous venture capital industry, its goal was
achieved and it was privatized (Sadovski, 1999).
Second, to reduce the risk of failure of a national software industry development plan,
strategy decisions must involve people with deep knowledge of the industry. Political and
social objectives must be tempered by technical and market realities – ever-changing realities.
Risks of different kinds must be addressed for each strategic alternative, including the risk of
doing nothing at all.
Third, although national prestige is not often an explicit goal of government policy, it
should be. Successful software strategies have raised global awareness and respect for the
high-tech activities of Ireland, Bangalore, and Andhra Pradesh in a matter of a decade or so.
This kind of success can be turned into the energy and political will for even greater
achievements.
Finally, expectations must be managed. Metrics must be appropriate. A national
project whose main goal is development of software capacity (e.g., through R&D in some
emerging technology area) should not be judged a failure if it achieves its primary goal, but
fails to also result in export revenues, for example.
6. THE ELEMENTS OF A SOFTWARE INDUSTRY D EVELOPMENT STRATEGY
Many elements of software industry development will be driven by private initiative. Some
industry problems, however, require policy and regulatory reforms or investments in human
resources and other requirements, because the market forces are too weak or too slow to meet
urgent development priorities. Government action can involve reforming policies and
eliminating regulatory impediments (labor, trade, finance, customs), creating or enforcing
needed regulations (telecommunications, e-commerce laws, intellectual property protection);
or providing long-term investment (infrastructure, research funding), direct investment (seed
funds, export promotion), tax incentives, and, of course, expenditures for government
automation and electronic delivery of public services.
6.1 Developing the Telecommunications Infrastructure
Reliable affordable telecommunications and Internet infrastructure are critical to software
exports and to its deployment throughout the economy. All economic development is
increasingly dependent on this infrastructure, and most countries are comfortable making the
required infrastructure investments if they can. In India for example, the government initiated
a program for developing software technology parks, which helped prime the pump for
software exports in the early 1990s and enabled small and medium enterprises to bypass the
underdeveloped telecommunications infrastructure. However, low telecommunications
density in India and in many other emerging economies continues to limit the diffusion of
ICT and software applications in support of domestic needs, as well as impede country
advantage in exporting low cost software services. Increasingly, countries are relying on
private sector investment to improve and expand their telecommunication infrastructures, by
privatizing public telecommunication monopolies, liberalizing entry and private investment
in telecommunications, and creating effective telecommunications policies and independent
regulatory commissions.
Despite this market-driven approach to telecommunications, rural connectivity
remains very low in most developing countries, even among those nations that liberalized
their telecommunication sector for a decade or more, as in most of Latin America. Thus,
innovative approaches to complement the market must be found. Chile pioneered a least-cost
subsidy approach to provide incentives to private operators to meet certain connectivity
targets in the rural and isolated areas. Other countries such as Sri Lanka are also considering
the use of such smart subsidies to extend these infrastructures to their rural areas and poor

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communities. In principle, this approach can also be extended to promote the development of
community access or public information centers. Such infrastructure development
considerations go beyond those concerned with software exports, but they are integral to any
strategy to promote the use of software and local content to address problems of rural
development, small enterprise development, employment generation, and poverty reduction.
6.2 Developing the Domestic Market for Software
The domestic use of software technology is perhaps the most important driver of software
industry growth for emerging economies. Government information systems projects can
create demand for trained people, stimulate the growth of services companies, and establish
models for careers for software professionals, while at the same time improving government
operations and services to citizens. The same is true of private sector demand for software –
stimulation of the software industry is part and parcel of improving business systems and
competitiveness in other industries.
As we mentioned in our discussion of the Irish software industry, the domestic
economy needs an indigenous software industry as a key component for development.
Conversely, the indigenous software industry needs domestic business in order to flourish.
Even India, Israel and Ireland, which are all seen as primarily software exporters, had to
evolve local opportunities for software capability development: the defense industry in the
case of Israel, serving local subsidiaries of multinationals in the case of Ireland, and some
demonstration projects like the railways reservation system in India. Now they have all
developed significant indigenous industries: India, $2.36 billion in domestic revenues in
5
2001; Israel, $1.2 billion; and Ireland, $1.12 billion. But the lack of broad domestic market
for software in the case of India may have also limited its software exports to the relatively
6
low-value segment of the market.
One important role of the domestic market for enterprise systems (business and
government) is as a proving ground for innovative ideas, new products, and startup
companies. In order to serve this role for innovative firms that hope to sell globally,
government and business organizations must offer a “base level” of automation consistent
with standard practice in the target markets. This base level involves standard platforms
(hardware, middleware, database, communications protocols, etc.), widely- used applications
(like Enterprise Resource Planning and Customer Relationship Management), and standard
software architectures, programming languages and tools. Demand for innovative systems in
the private sector, as well as for base- level automation, is often stimulated by tax credits.
Rewards for IT innovation can be used as a stimulus for both government and bus iness
institutions.
The financing of innovative systems to support SMEs, rural populations, national
education programs, and so on is more problematic. (See, for example, Hanna, 1995,
regarding OECD programs for IT diffusion to SMEs). One approach might be to create
innovation funds whereby governments would share the cost of R&D with software
companies and NGOs to promote the development of innovative societal applications that

5
In comparison, we recall the 2001 export revenues from these three countries: India, $7.5B; Israel, $3B; and
Ireland, $1.3B.
6
Where there is extensive software piracy, there is no domestic market for many classes of software products. This
problem does not affect software services, and is less critical for enterprise systems than for consumer software,
but governments should consider the health of their own national software industries in their IP protection
policies and anti-piracy enforcement programs.
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would meet local needs, particularly for students, small farmers, and other underserved
7
segments of the domestic market.
Innovative systems, those beyond the base level, may seem like an unnecessary
burden for the already difficult process of automation of government and private
organizations. In fact, to avoid risk, organizations often prefer to work with “experienced”
offshore vendors and consultants. It is important to note, however, that these vendors get their
experience by making mistakes. The success rates for many kinds of information systems
projects are astonishingly low, even in the US. (Standish Group, 2000) The potential
additional risk of working with domestic suppliers must be weighed against the gradual
improvement of domestic services and growth of the industry.
6.3 Developing Human Resources
The global market for IT professionals of all sorts continues to grow (NSF 2002; OECD,
2002). However, it fluctuates from year to year, moves from one technical specialty to
another, and often results in a brain drain of the most talented people to the most active
industry centers. Since software capacity is correlated directly with the size and skill of the
available workforce, there is no more important element of a country’s efforts to increase
software capacity than the development of its corps of software professionals.
It is important to note that only some IT professionals are software programmers.
Every software team is composed of people with a variety of skills. People who design
programs are at a different level of talent than those who test and maintain other people’s
code, and they use different tools and need to know about different software technologies.
Team composition varies across sectors of the industry. Typically in software publishing, for
instance, one software architect could drive the work of dozens of talent ed software
developers. Software project management is another skill area that is often in short supply,
with costly consequences.
In dealing with the range of skills required in software industry development one
point must be emphasized: software abilities are based on innate talent, not just intelligence
and training (Barr and Tessler, 1996). Offering education and training to all comers will not
necessarily draw the talented people into the industry. Without them, the effort to build
software capacity will fail. In some countries, immigration can be used strategically to
increase capacity, but talented youngsters must be attracted into the field. The best long-term
approach is to create demand for talented programmers and experienced managers. Creating
stable, long-term software career paths will attract talented people into software. This need
should be a consideration in government civil service practices too.
Universities are particularly challenged by software education. Not only is rapidly
changing technology and methodology hard to capture in the curriculum, but also practical
experience with software projects is as important as the theory. Much of the important
knowledge has not been codified and can only be taught by experienced practitioners. One
approach is to establish professional software schools modeled after medical schools or
architecture schools, where practicing professionals teach alongside leading researchers (Barr
and Tessler, 2002).
Private software education and training is supplementing university training in many
countries, and producing large numbers of programmers. Ideally, software engineering and
computer science schools should produce in adequate numbers the next generation of
teachers and cutting edge researchers, as well as technical managers, software architects,
designers, programmers, and testers of all sorts, and software-savvy professionals from

7
One of the authors, Nagy Hanna, is assisting the government of Sri Lanka is developing such an innovation fund
for societal applications.
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engineering, humanities and business disciplines, who will support the use of IT in their own
fields. This ideal mix may be difficult to achieve and one that might take twenty years to get
right. In the interim, some strategic programs to provide scholarships, R&D grants, and other
incentives will help to produce the right balance of people.
Labor laws have a critical impact on human resources for the production and
deployment of software. Many countries need to adjust labor laws to address issues specific
to the software industry, especially to the startup companies that are so important in software
and the knowledge economy: hiring and termination regulations, compensation and
promotion practices, immigration, and so on. In ICT-enabled businesses, call centers and
back office services, for example, flexibility is required in term of shift hours, and demands
for different language skills or other knowledge may vary considerably as new clients come
and go. In software services, project-based staffing is typical, and different skills may be
required for each new project. Workforce mobility, the ability of workers to move freely
among emp loyers, has been cited as a major advantage of Silicon Valley since this practice
shortens the learning curve across all companies in the region (Saxenian, 1994).
6.4 Encouraging Innovation and the Creation of a Supportive Habitat for
Entrepreneurs
Innovation is key in the software industry – both technical and business innovation. And
increasingly, innovations in all aspects of our lives are achieved through software. New
technologies, new solutions, and new ways of doing business characterize the new economic
milieu. Governments typically stimulate innovation through university research grants and
scholarships for graduate students and incentives (tax write-offs) for corporate R&D.
Another area where governments can be quite effective is in creating opportunities for
innovation in their own information systems (as we discussed above in the section on
developing the domestic market). The result of fielding systems that show new ways of
governing can have a direct impact on national prestige and on local firms (who are engaged
in systems integration and process reengineering tasks) that will later export those
innovations.
There is a growing recognition of the need to form learning or innovation clusters
around software companies. Professor William F. Miller of Stanford coined the term
“habitat” to describe the nexus of advisors, investors, and practitioners that formed around
the Silicon Valley high-tech startups (Lee et al., 2001). The habitat is not only vital to the
growth of the software industry, but taken together, the specialized support firms of the
habitat are an important source of business and job creation. These software habitats may
represent a specialized case of innovation or industrial clusters that have been studied
elsewhere. They reflect the changing nature of competition and market-based innovation
systems. Successful and innovative firms are seldom alone; rather, they tend to cluster
together and create affiliations with each other based on specialized knowledge and
production flows. Cluster studies, mainly in industrial countries, indicate a need to redefine
the role of government as a facilitator of networking, a catalyst of dynamic comparative
advantage, and institution builder – creating incentives to promote innovation and networking
(Roelandt and den Hertog, 1998).
The role of the state in OECD countries is shifting from direct intervention to indirect
inducement, such as initiating broker and network agencies and schemes, and providing
platforms for constructive dialogue and knowledge exchange. But it still includes other
initiatives beyond information sharing, such as cluster development programs in Finland and
the Netherlands; regional development agencies in the UK, Germany and the USA; the
Flemish R&D support to clusters; and the initiation of joint industry-research centers of
excellence in many of OECD countries (see also Roelandt and den Hertog, 1998). The US

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government did not create Silicon Valley, but the significant research funds that it granted to
area universities and defe nse businesses certainly had an important indirect impact.
There are pitfalls, however, in promoting clusters. Cluster-based initiatives should not
be government-driven, but rather the result of market- friendly approaches, with government
acting as broker and catalyst that brings actors together and supplies supporting structures
and incentives to facilitate the clustering and innovation. Governments have discovered
belatedly in Japan, Korea (Agarwalla, 1998), Malaysia (Mellor 2001) and elsewhere, that
neither government decree nor investment in real estate necessarily creates a cluster. The
most successful clusters or habitats seem to arise “spontaneously” with the confluence of
skilled people and technical resources.
6.5 Stimulating New Business Creation and Finance
Another unique aspect of the software industry is the degree to which small companies
dominate the rapidly growing front in most market segments. In software publishing,
software technology licensing, IT-enabled businesses, and even software services, new ideas
and innovative solutions are often brought to market by startup companies.
Several countries have already pioneered ways to address potential regulatory pitfalls
in areas like new business creation, high-risk capital investment, foreign ownership of
intellectual property, mobility of the workforce, corporate governance, and flexibility of
business operations. Their “lessons learned” form a whole literature on enabling software
entrepreneurship (see Lee et al., 2001, and Rosenberg, 2002).
Many countries have also participated in the stimulation of technology startups with
investment funds. The best practice here is to partner with industry-savvy investors, i.e. to put
up matching funds for co- investment with seasoned professionals, as Israel’ s Yozma funds
required. Similarly, Taiwanese VC's say that their experiences in partnering with Silicon
Valley VC’s and sitting on the Boards of high quality US startups were extremely valuable
contributors to their success (Kenney et al., 2002)
One important trend in the software industry may make it much easier for emerging
economies to participate in the most advanced areas of software entrepreneurship. The
“transnational software startup” is a sophisticated arrangement, pioneered by Israeli and
Taiwanese high-tech entrepreneurs and financiers, which involves forming an international
startup business from resources located in several countries, with facilities located in the
globally optimal locations. For example, suppose an Irish software R&D lab invents a LAN
security algorithm. They might partner with a Singaporean device manufacturer to design and
build a portable LAN security-testing device. They might get financing in both Singapore and
New York, then move their headquarters to Washington, D.C., the ir first regional target. In
this model, players with only part of the solution, e.g., an invention or a software
development capability, can still participate in the software industry.
6.6 Supporting Software Exports
Software publishers and services providers as well as ICT-enabled services vendors have
some special difficulties related to global marketing. For example, the initial investment in
language training, computer literacy, job training, and systems setup is considerable. This
problem is particula rly apparent in customer support for software publishers, and for ICT-
enabled services vendors selling low-cost help desk services to foreign companies. Another
difficulty, of greater concern to systems integrators and product publishers, is the lack of a
domestic market in the initial stages of their market segment growth. These companies must
market abroad immediately, without the benefit of experience and validation from domestic
customers (not to mention domestic revenue).
Small software companies are particularly challenged in identifying, understanding
and penetrating foreign markets – they just don’t have the specialized marketing expertise.

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Often it does not exist in the country. Moreover, some vendors have significant problems
selling abroad because their country or region is not perceived as one producing quality
software. The establishment of the India software services industry exemplifies an apparent
chicken-or-egg problem. Many years of work with few successes were required before the
country became known as a reliable sourcing alternative. Then it “suddenly” became a
globally accepted industry participant and grew rapidly (Tessler and Barr, 1997).
Software is a global industry with intense global competition, and more coming, in
every segment of the software and ICT-enabled services industries. As a result of the adverse
circumstances, like those mentioned above, countries like Ireland and Korea have been quite
proactive in helping their software industries develop foreign markets with various programs:
• Marketing programs to position their country and their companies and to build
country image and “brand”.
• Establishment of trade missions to introduce emerging software enterprises to market
influencers and intermediaries as well as to venture capitalists.
• Programs to bring potential customers and market influencers over to their country to
visit tech centers and meet potential suppliers.
• Extensive market identification research and analysis, and marketing support to help
local vendors understand and target markets they’ve never seen.
• Support for software quality programs for exporters, to help establish a reputation as a
high-end provider, as Korea and Singapore have done.
• Use of successful government projects as reference sites for domestic vendors.
Countries at the very beginning of the development of their software industry must
wait until they have something viable to take to market before even considering this kind of
effort and investment, but whatever their domestic industry creates, they will likely need help
taking it to the global market.
6.7 Mobilizing the Diaspora
Many emerging and transition economies have considerable links to sizable friendly
communities in the USA and Europe, and these can play critical bridging roles. In Silicon
Valley, for example, Indian and Chinese (including Taiwanese) immigrants are playing a
major role in keeping the Valley dynamic and cost-competitive. Between 1995 and 1998, the
Chinese and Indians were found to be running about 29 percent of the region’s high-
technology companies (Saxenian, 2001). More important from this paper’s perspective is the
contributions these Diaspora communities are making to their countries of origin. Based on
an understanding of both environments in the USA and country of origin, “they have created
a rich fabric of professional and business relationships that supports a two-way process of
reciprocal industrial upgrading” (Saxenian, 2001).
Many Taiwanese engineers began returning to Taiwan in the 1990’s, drawn by active
government recruitment and incentives, and by the opportunities created by rapid economic
development. Another growing cohort of highly mobile engineers began commuting across
the Pacific regularly. This expatriate community helped accelerate the technological
infrastruc ture of Taiwan by transferring technical know-how and business models, by
influencing technology policy in Taiwan, and by forging marketing and other ties with
Silicon Valley. The Indian engineers helped promote India as a viable location for software
development, and to a lesser extent, started to stimulate investment and to transfer the
information and know how about the new markets and technologies.
Many other countries, perhaps smaller or poorer, may also have transnational
communities that can play a key role in the development of the software industry. This
potential contribution cannot be realized, however, without coherent and effective national
strategies to mobilize scarce entrepreneurial and technical talents.

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7. ADAPTING POLICIES AND STRATEGIES TO LEVELS OF D EVELOPMENT

As the previous discussion suggests, there is no one-size- fits-all set of policies or an off-the-
shelf software development strategy for countries with different initial conditions and levels
of development. Lessons of experience are emerging concerning the main elements of
national software strategies and the appropriate roles for government and public policy. But
these lessons must be carefully related to the local realities, technological capabilities and
potential comparative advantages of each country (Hanna, 1996).
While there is no single typology that can capture these differences among countries
and the corresponding policies and strategies in support of software export and capacity
development, we offer some general comments:
For countries with advanced technological capabilities and dynamic national
innovation systems, such as Israel and Finland, strategies are likely to focus on innovative
segments of software exports, on commercialization of intellectual property, on joint research
and strategic partnership with multinationals, and on working with leading domestic users. In
contrast, for countries with less advanced innovative capabilities but a potentially large
domestic base of user industries, such as the Philippines, Indonesia or Vietnam, the focus of
national software development may be on targeting those segments that are critical to the
competitiveness of key local industries and leveraging such producer-user linkages to build
competitive capabilities for software export in these segments. This approach would apply
equally to developing software to modernize key service sectors such as finance and tourism,
and for e-government applications, as in India and Brazil.
Countries with small domestic markets but a large presence of multinationals or their
subsidiaries, as in Ireland and Singapore, may leverage this presence to develop software
products and services to support these MNCs, first locally, then globally. Countries with
substantial pools of science and engineering resources with relatively low wages, such as
India and China, may rely first on relatively low value-added outsourcing opportunities, then
systematically move to higher value-added segments of software services, or perhaps
leapfrog into selected niche markets of software products, as may prove to be the case for
Russia and some East European countries.
Even the least technologically developed and poorest countries cannot afford to be left
out of the increasingly knowledge-based global economy. Their software capacity
developments might focus on those capabilities necessary to support and maintain their
national information infrastructure, including public information and services, and trade
facilitation systems.
Countries may deploy different software export or outsourcing strategies in response
to physical, cultural and/or temporal distance from their primary markets and these strategies
often lead to different software specializations (Carmel and Agarwal, 2001). For example,
India is able to engage in low leve l design, contract programming, and maintenance as these
relatively structured activities demand less coordination and reduce the need somewhat for
intensive collaboration in global software development.
For all countries, regardless of level of developme nt, the fundamentals must be right;
that is, public policies that support openness, competition, digital literacy and private sector
led ICT infrastructure. But to compete and share in the dynamism of this large global industry,
countries with potential dynamic competitive advantage must move beyond these common
prerequisites.
8. CONCLUSION
The impact of software cuts across all sectors of the economy, and the progress of other
sectors will, in turn, spur further growth of the software industry. Strength in software (i.e.,
both knowledgeable software professionals and a software- literate workforce) has become an

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important factor in foreign direct investment. It is also now a major component of modern
industrial and commercial infrastructure and government administration. Finally, software is
the implementation vehicle for major social programs such as distance learning, telemedicine,
and on- line cultural offerings.
While the creation of effective software industry support policies is complicated by
this broad ranging impact on business, government, and the public, the bottom line is that
support for the software industry in any emerging economy is likely to be an integral
component of the social and economic development agenda. Every country has to meet a new
minimum “knowledge standard” that includes a software-literate workforce, and enough of a
software industry to make the country a credible participant in the global knowledge
economy.
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Author Bios
From 1994-2000, Tessler and Barr directed a major study of the global software industry at
Stanford University with Professors Edward A. Feigenbaum and William F. Miller, under a
grant from the Alfred P. Sloan Foundation. This research project focused on the overall
economic analysis of the global software industry. In addition, a research grant from the
Chong-Moon Lee Foundation and subsequent consulting work for the South Korean Ministry
of Information and Communication have given the authors an inside look at the strategic
policies and programs of an enlightened government with the will and means to stimulate
software industry development. Their papers are available at www.aldo.com/papers.

Nagy Hanna led the World Bank assistance on software industry development for many
countries, staring with India's software export development in early 1990's. Currently he
focuses on ICT-enabled development strategies and serves as the Bank's senior advisor on e-
development. Among his relevant papers and books, see: The Information Technology
Revolution and Economic Development, 1991; Exploiting Information Technology for
Development: a Case Study of India, 1994; The Diffusion of Information Technology:
Experience of Industrial Countries and Lessons for Developing Countries, 1995; the East
Asia Miracle and Information Technology, 1996; and e-Development: Towards an ICT-
enabled Development, 2002 – all published by the World Bank.

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